Arsene Taxand - VAT & indirect taxes

A few reasons to challenge the social solidarity contribution for companies in light of the first VAT Directive by Alain Recoules

A number of French companies have recently brought legal action to contest the compatibility of the social solidarity contribution for companies solely on the basis of the First VAT directive prohibiting cumulative multi-stage taxes.

These legal actions have led to a number of reactions both ways by French tax lawyers.

For some of them, the avenue of the First VAT directive cannot validly be pursued as the European Court of Justice has already responded to this question, in particular in the Rousseau Wilmot (C-295/84) and IRAP (C-475/03) cases where the Court, to whom a question was referred with regard to the scope of application of Article 33 of the Sixth VAT directive, already interprets this article in a broader context, also referring to the First VAT directive. According to these tax lawyers, as the Court did not make, on this occasion, any formal distinction between these two prohibitions, the prohibition on taxes that are equivalent to VAT and that on cumulative cascade taxes, it must be concluded that European Community law as derived from the directives provides for only one prohibition with regard to turnover taxes, the prohibition laid down in Article 33 of the Sixth VAT directive, namely a prohibition on taxes that are comparable to VAT.

Furthermore, it has also been stated that, although cumulative multi-stage taxes were to be abolished as a result of the first VAT Directive in 1967, States could subsequently re-create taxes of this kind.

For others, and this is the point of view that we share in our firm, the issue should be submitted in good faith to the French and European courts.

First, it may be noted that the arguments logic raised against this type of litigation necessarily leads to it being considered that cumulative multi-stage taxes are thus authorized by European law. In this way, if it were to be considered that there is only one prohibition, that laid down in Article 33, then cumulative multi-stage taxes which, by definition, will never be considered as taxes that are comparable to VAT (as they never meet the criteria for deduction) are therefore authorized in Europe.

A strange conclusion, which, if it were to be adopted by the courts, could have bombshell effect for 27-member Europe …

Considering, in order to attenuate this paradoxical conclusion, that cumulative multi-stage taxes were effectively prohibited until the 1st VAT directive came into force (acts for the promulgation of this directive were passed in each Member State before 1972), for them to be freely re-created by each State a short while later, is also a strange way of reasoning to say the least. This is forgetting that, as far as France is concerned, VAT, within the meaning of the common system (modern VAT) was introduced by the law of 1966, which modernized and extended the historical turnover tax dating back to 1954, and abolished a certain number of old taxes. From a national standpoint, our VAT system is more the result of a law, as France "invented" VAT, than a directive. From a legal standpoint, nevertheless, the European directives, and in particular the First VAT directive, should be applied.

In actual fact, it seems to us that the grounds for challenging the contribution may be expressed in simple terms:

-the "replacement of the cumulative multistage tax systems" which existed in Europe and France, by the common system of VAT, was a necessity; the penultimate recital of the first VAT directive rightly states this;

-Article 1 of this directive provides that Member States shall "replace" their present system of turnover taxes by the common system of VAT;

-the use of the same term of "replacement" in both the recital and Article 1 therefore means that, at the time, when referen ce was being made to turnover taxes that existed prior to 1968, reference was not being made to the modern concept of VAT (i.e. the common system) but to all turnover taxes, most of which are cumulative, as stated in the penultimate recital, but not all;

-not interpreting Article 1 of the 1st VAT directive referring to its recitals is a strange way of reasoning; furthermore, without even making any reference to them, giving a modern meaning to the "turnover taxes" under Article 1 (namely, by limiting such taxes to those which would meet the four essential features laid down since then by the EU court) corresponds to an extremely "retrospective" analysis.

In conclusion, the interest shown by tax lawyers alone with regard to this topic duly shows that there is room for debate and that the question of the existence of a prohibition on cumulative multi-stage taxes, that is different to the prohibition on taxes equivalent to VAT, is worth raising. A lawsuit of this kind instituted in good faith offers three advantages:

-preserving the rights of companies, until this question has been finally settled by the French and European courts;

-enabling the courts, particularly following the IRAP decision, which had the merit of providing detailed clarification of the interpretation to be made of the four essential features of turnover taxes referred to in Article 33, to define whether there is an autonomous prohibition with regard to cumulative multi-stage taxes;

-giving the Commission an opportunity to specify the sense of harmonizing the common system of VAT, if, alongside such system, a system of cumulative multi-stage taxes may be freely recreated by each State with the risk that this may ultimately endanger the Union's own resources.